Challenges When Startups Move Into the Big Leagues

Entrepreneurs are known for their passion and commitment—doing whatever it takes to push their small businesses to new heights. But it can be tough to grow a company beyond $1 billion in annual sales without hitting a few speed bumps in the road, as the experience of Greek-yogurt tycoon Hamdi Ulukaya of Chobani shows. Here are five common issues entrepreneurs run into as their businesses succeed and expand:

Rapid growth can have its drawbacks—not only by hiding issues on the balance sheet like poor profit margins, but also conditioning management to become obsessed with keeping that pace as the company gets larger. When Starbucks Corp. founder Howard Schultz stepped down as CEO in 2000, the company aimed high to continue its double-digit sales and profit growth that had sent its stock soaring—venturing into books and music and losing sight of its core: making good coffee. Getting caught up in the rush backfired, and by 2007, Starbucks was faltering, having oversaturated the market and commoditized the coffee-house experience. Mr. Schultz stepped back in the following year, in an attempt to get Starbucks back on track, closing some stores and retraining employees. By late 2009, his work was paying off—Starbucks posted its first quarterly earnings growth in over a year.

For many entrepreneurs, there is a sense of righteousness associated with not selling out to a big company. Chobani’s founder and CEO Hamdi Ulukaya says Chobani prides itself in not using artificial sweeteners or preservatives, even though its ingredients cost more. Many consumers—such as the nearly one million who “like” Chobani on Facebook—praise its tenacity. Yet a lot are buying competitors’ yogurt, such as Dannon and Yoplait, because they have better deals, Chobani admits. It has lost market share in recent years as a result, but says that is the trade-off for staying true to the brand. Bernhard Schroeder, director of Lavin Entrepreneurship Center Programs at San Diego State University, says transparency is becoming increasingly important among consumers, and smaller companies often have more ability to provide that than big ones.

Expanding operations for future growth is crucial for startups, but if growth doesn’t keep up with expectations, that can leave companies with excess capacity and unmanageable debt. Food safety recalls or other litigation can also lead to that problem. Some food startups, like Hampton Creek, the maker of eggless Just Mayo, seek investors early on to fund initial research and get products on shelves. Others, like Chobani, hold out for fear that “corporate types” will hinder its ability to take risks that will help it expand. Dileep Rao, a business professor at Florida International University who has worked with entrepreneurs for decades, says the timing depends on the company’s needs and goals, but it is important for that time and the particular investor to be right. It’s no easy task. “Entrepreneurs have fantastic visions. The trouble we find is investors and financiers don’t have much vision,” he said.

Many founders are hesitant to give up what is arguably the most valuable role in a company: the CEO. But bringing in a professional with expertise in big business can be crucial to the company’s future. The same goes for other management roles along the way. “They have to recruit professional managers to learn how to adapt to being a larger company,” Mr. Rao said. But many entrepreneurs “have trouble being No. 2,” he added.

Chobani’s Mr. Ulukaya says that since bringing in outside investors, he has made a major effort to maintain the culture and “soul” of the company. He says signing a deal with “Big Food” would be detrimental to the brand and isn’t even a consideration. Many small brands can lose their ability to come out with new products quickly and stay on top of consumer trends when layers of management are added, even with the best of intentions, such as for food safety. For instance, the Kashi brand, which was bought by Kellogg Co. in 2000, suffered a hit to its reputation as a leading natural-food maker several years ago when it was slow to remove genetically modified organisms from its supply chain, a step many of its competitors already had undertaken as consumer interest in non-GMO and organic foods rose.